Federal Alimony Tax Rules Have Changed – Here’s How It May Affect Your KY Divorce

The federal tax revisions enacted by the ‘Tax Cuts and Jobs Act (TCJA) went into effect on January 1, 2018. While the reforms will affect all Americans filing tax returns in 2019, divorced taxpayers should be especially concerned about how the TCJA may influence their alimony agreements.

Alimony arrangements entered in 2019 are no longer deductible on your federal tax return as a result of federal tax reform. Alimony payments, like child support payments in Kentucky, will no longer be federal tax deductible for the payor and will not be considered federal taxable income for the recipient. Divorces finalized before January 1, 2019, were grandfathered under the previous tax laws.

As of March 2020, Kentucky had not updated its statute to comply with federal tax reform, which means that all alimony payments are still deductible for the payor and taxable to the receiver for state income tax reasons.

The payor’s federal tax deduction for alimony is no longer available (for Agreements Signed in 2019)

Higher-earning spouses have traditionally consented to more generous alimony arrangements since the payments can be deducted from their taxes. The contributions were deducted from the payer’s total taxable income, allowing some people to file in a reduced tax category (and at a lower tax rate).

This is no longer true. There is no federal tax incentive to pay alimony payments under the new tax legislation. This will almost certainly have an impact on the settlement tactics of higher-earning spouses in 2019.

Alimony is no longer considered taxable income to the recipient under federal law (for Agreements Signed in 2019)

This appears to be a significant financial gain, especially given that the recipient is often in a lower tax band than the payor, to begin with. But not so fast: while determining a spousal support arrangement, judges examine a number of factors, including the tax implications of alimony payments.

If the payor is unable to make larger payments without the tax deduction, the judge may agree to lower payments. Alternatively, the parties may agree on a lump sum divorce payment instead. Both approaches may result in the recipient receiving less money overall.

Furthermore, the spousal support recipient may need to reconsider his or her retirement strategy. Contributions to retirement accounts frequently entail the use of taxable income, which may force the beneficiary to source the contribution money elsewhere.

In 2019, be wary of Kentucky Alimony Modifications.

Divorces concluded prior to December 31, 2018, will be grandfathered under the previous federal tax regulations. This arrangement, however, may be null and void if a previous agreement is changed after the Dec. 31 deadline and expressly specifies that the TCJA treatment of alimony now applies.

Attorneys should be on the watch for alimony modification proposals in 2019 that are meant to take advantage of parties who are unaware of the ramifications of the new federal tax law.

Consider Other Kentucky Alimony Reforms

Governor Chris Christie signed an alimony reform measure in 2014 that replaced the concept of “permanent alimony” with “open durational” alimony. With few exceptions, the duration of payments for marriages lasting less than 20 years cannot exceed the marriage’s lifetime.

For example, if you were married for two years, alimony payments cannot go longer than two years.

When establishing a spousal support agreement in Kentucky, divorcing couples must consider these additional limits.

Hire a Divorce Lawyer in Kentucky

Arons & Solomon Divorce Lawyers’ divorce attorneys collaborate with a team of experts, including Certified Financial PlannerTM professionals and CPAs, to help consumers construct divorce settlements that match their financial needs.

To ensure that you are getting the most out of your current or pending alimony arrangement.